Follow Up

CBS Gets Ready for Prime Time

Media titan CBS plans to become more of a pure-play content company, as it aims to spin off its outdoor advertising business. And shares of high-end automotive toolmaker Snap-on have risen, but they don't have much more room to run.

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In its effort to become more of a pure-play content company,
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24.880155302880233Market Cap
30759504288.7909
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0.9554140127388535% Rev. per Employee
601831More quote details and news »CBSinYour ValueYour ChangeShort position
just announced a clever, and lucrative, step. The New York-based media giant is spinning off its outdoor-advertising business—which CEO Leslie Moonves told Barron's last June he'd be willing to sell for the right price—into a real-estate investment trust.

In so doing, CBS (ticker: CBS) has accomplished what few thought it could—elicited a price tag of as much as $6 billion for the billboard business, just the dollar amount Moonves kept insisting (despite many protestations) it was worth.

More to the point, the move has garnered renewed appreciation for the admirable job Moonves and his team have been doing to refashion the $27 billion (market value) company, and lessen its reliance on revenue from economically sensitive advertising sales. Only the Americas billboard business will be in the REIT; CBS hopes to sell outright its counterparts in Europe and Asia. In total, that will reduce advertising's contribution to 50% from 60% of 2013's estimated revenue of $14.8 billion, prior to the REIT conversion, which CBS expects to complete in 2014.

The REIT idea was a hit. CBS shares have jumped 11% since the mid-month announcement, to a recent $42, near their 52-week high and right where Barron's said they'd be by mid-2013 when we last looked at the company ("CBS's Star Turn," June 11, 2012). That was the second time in 18 months we expressed partiality to the CBS story, and the plot line hasn't disappointed. Since we first recommended CBS in June 2011, the stock has soared 63%, trouncing the 18% rise of the Standard & Poor's 500 index over the same span.

Not only does the REIT move give CBS a potential one-time boost to earnings of 10%, "as the shares become less cyclical they deserve a higher multiple," says Scott Harrison, a senior analyst at Argent Capital. CBS now fetches a multiple of about 14 times forward 12-month earnings estimates of $2.91 a share. If CBS were to achieve the 16 multiple accorded to the lower-end of pure-play content producers such as
Scripps Networks Interactive SNI 2.2501380452788515%Scripps Networks Interactive Inc. Cl AU.S.: NYSEUSD74.07
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9537680477.31854
Dividend Yield
1.2420683137572566% Rev. per Employee
1211570More quote details and news »SNIinYour ValueYour ChangeShort position
(SNI), its shares would rise another 12%, to around $47.

But Harrison notes that CBS has been able to command ever-higher prices in periodic negotiations with distributors such as cable and satellite firms, streaming video services such as Netflix (NFLX), and local TV stations and nonaffiliates.

That programming, including adaptation for a summer miniseries of Under the Dome, a Stephen King novel published by CBS's Simon & Schuster unit, and the broadcast of the Super Bowl in early February, gives Harrison confidence CBS shares can go 30% higher, hitting the mid-50s in the next 12 months.

CEO Moonves is also pumped up by the programming lineup. "The Super Bowl has become a national holiday," he tells Barron's. Already, advertising for the most-watched event on television has "gone through the roof," says Moonves, with a few 30-second spots exceeding $4 million and an average cost of about $3.8 million for a 30-second spot.

Moonves also notes that ratings for the CBS network, which got off to a slow start in the fall, are recapturing "first place across the board in every demographic." Moonves says he feels "very good about the rest of the year." Investors should feel good, too.

It turns out we weren't optimistic enough. Since our story, Snap-on shares have jumped 35% to a recent $82, while the Standard & Poor's 500 has risen 14%.

Earnings projections for Snap-on are slightly rosier than they were a year ago, but most of the gains have come from improved investor sentiment or, as Wall Street likes to call it, multiple expansion. At just over 14 times this year's estimates, Snap-on now trades in line with peers. With the catch-up complete, Snap-on's rally is running on empty. From here, the stock is more likely to trade in line with the broad market.

Snap-on is scheduled to report full-year 2012 earnings on Feb. 7; Wall Street expects net income of $301 million, or $5.14 a share, a 14% gain from the prior year.

Barrington Research analyst Gary Prestopino, who spoke to Barron's about the stock last May, still raves about Snap-on's business. The company is focused almost solely on the professional market; it sells tools in the U.S. through a network of 3,500 franchised vans that frequent independent garages. The company also sells computer systems to repair shops, and it is increasingly selling to new customers in the aviation, oil and gas, and mining industries.

"The brand franchise is just so strong. That's been a significant intangible factor for the company for years," says Prestopino, who rates the stock at Market Perform. Still, he doesn't see much likelihood of the company blowing by the consensus estimate of $5.66 a share in 2013 earnings.

Having recovered from the recession, Snap-on's earnings are now likely to grow at a slower 10% annual rate. Investors should ease off the gas.